Australian case clarifies when a patent licence can be terminated

It is common in a patent licence for the patent owner to license more than one patent. Often there will be patent protection in more than one country, while different patents or patent applications may cover different aspects of the licensed technology.

But what happens to the licence where some, but not all, of those patents expire or cease to be in force? It is a question that has left IP practitioners in both New Zealand and Australia wondering, due to section 145(1) of the Patents Act 1990 (Australia), and its New Zealand equivalent, section 168 of the Patents Act 2013.

Section 145(1) of the Patents Act 1990 states:

A contract relating to the lease of, or a licence to exploit, a patented invention may be terminated by either party, on giving 3 months' notice in writing to the other party, at any time after the patent, or all the patents, by which the invention was protected at the time the contract was made, have ceased to be in force.

Section 145(2) provides that the parties to a patent licence cannot exclude or contract out of this provision.

IP practitioners have long been uncertain as to how to interpret this provision. What would happen if the patent licence covered multiple inventions protected by multiple patents? Under the wording of section 145(1), it might be argued that the entire licence could be terminated if all the patents for just one of those patented inventions ceased to be in force.

In that case, the relevant licence covered a number of different patented inventions, and those inventions were protected by a number of different patents. The licensee, Regency Media, sought to terminate the licence, relying upon section 145(1). Regency Media argued that because all of the patents for one of the patented inventions covered by the licence had ceased to be in force, it could terminate the entire licence, even though that licence also covered other patented inventions.

But the court found that the definition of “patented invention” in the section in fact meant “patented inventions”. Thus, the licence could only be terminated upon all of the patents for all of the patented inventions ceasing to be in force. The court relied on the Acts Interpretation Act 1901 (Australia), which provides that words in the singular number include the plural “unless the contrary intention appears.” The court was not persuaded that any such contrary intention appeared in section 145(1).

What this means is that, in Australia at least, a patent licence can only be terminated by a party under section 145(1) if all of the licensed patents cease to be in force. This will be the case even if the licence provides otherwise.

It should also be noted that both parties to the dispute accepted that the only relevant patents to be considered under section 145(1) were the Australian ones. Thus, it would appear that the licence might have been terminable upon all Australian patents ceasing to be in force, even if some foreign patents had remained in force.

The situation in New Zealand

Section 168(2) of the Patents Act 2013 applies to patent licences governed by New Zealand law. It states:

A contract that this section applies to may be terminated by either party, on giving 3 months’ written notice to the other party, at any time after the patent, or all the patents, by which the product or process was protected at the time the contract was made, has or have ceased to be in force.

The wording is very similar to that in section 145(1) of the Patents Act (Australia). Section 168(2) refers to “the product or process” instead of “the invention,” but arguably this is not significant.

The Interpretation Act 1999 also provides that words in the singular include the plural and words in the plural include the singular, unless the context of the enactment requires a different interpretation.

So the situation under New Zealand law would appear to be largely the same as under Australian law.

While the decision by the Federal Court of Australia in Regency Media Pty Ltd v MPEG LA, L.L.C. would not be binding on a New Zealand court, it is likely to be highly persuasive.

Accordingly, it seems likely that a patent licence governed by New Zealand law cannot be terminated under section 168(2) unless at very least all of the New Zealand patents the subject of the licence have ceased to be in force. Whether any foreign patents would also need to have expired is not entirely clear, but arguably the reference in section 168(2) to patents is to New Zealand patents only.

So what does this mean?

The decision in Regency Media Pty Ltd v MPEG LA, L.L.C. will be of most interest to anyone who is licensing multiple patents. A licensee who enters into a licence of multiple patents cannot rely on patent legislation to terminate the licence where it finds that the value of the rights it licensed has reduced due to the expiration of only some of the patents. That licensee may be forced to continue paying a royalty for undertaking activities that are not even the subject of a patent.

This scenario can be avoided by some careful drafting of the licence agreement. For example, the licensee might insist on having the right to terminate the licence if particular patents or patent applications expire, are abandoned or are invalidated; or the right to pay royalties at a reduced rate in these circumstances. Or the parties might agree that the licensee will pay a royalty in relation to its activities in a particular country (e.g. on sales of licensed products), only where valid patent protection exists in that country.

Intellectual property licences are complex and full of traps for the unwary, especially patent licences. You should always get proper legal advice before entering into one.